TechPost: A Washington Online Broker

By Zachary A. Goldfarb

Steven Wallman, a former member of the Securities and Exchange Commission, created online brokerage Foliofn in March 2000, confident that a start-up company at the intersection of finance and the Internet would enjoy the fruits of the dot-com boom.

Problem was, March 2000 was the precise peak of the bubble, and Foliofn was precisely in the wrong place.

"We were at a triple bull's-eye," Wallman said. "The market over the next four years kept going down and down. It was not kind to any start-up company. It was specifically not kind to dot-com, Internet-based companies. And it was particularly unkind to a financial services Internet company."

Eight years later, Foliofn is a growing online business, based in Tysons Corner, that has more than 100 employees and says it makes a healthy profit. The company appears to have weathered the boom and bust cycle which battered many others out of existence.

Foliofn was created in the shadow of Washington's finance companies -- firms like Friedman Billings Ramsey and Fannie Mae -- and its tech giants, AOL, WorldCom and PsiNet. In fact, PsiNet was an initial investor in Foliofn. But if it were just an online brokerage, Foliofn might have been better located in the finance centers of New York and Chicago or tech king Silicon Valley.

Steve Wallman (Courtesy of Foliofn)

What has guided Foliofn is something very Washington -- using a custom technology to allow investors to buy stocks with an eye toward certain causes. Investors who use the site can screen stocks and indexes of stocks for areas in which they do not want to invest.

The screens include alcohol, firearms, gambling, genocide, military weapons, nuclear power and tobacco. With the genocide screen, for instance, investors can avoid putting their money into companies that do business in Sudan, where the government has been accused of committing genocide in the Darfur region.

Some 10 percent of the company's customers use the Sudan screen. The company does not release the number of customers it has.

Foliofn has applied this approach not just to buying individual stocks but also increasingly popular index funds, which are designed to track certain market benchmarks, like the Dow Jones industrial average.

But Foliofn allows people to pick and choose among the stocks that make up an index fund. So if you don't want one of the stocks that makes up the Dow, for example, Foliofn will allow you to buy the rest of the securities. And if investors don't have enough money to buy single shares of certain stocks, they are able to buy fractions of shares. The fractional share option also allows investors to buy stocks that come with a big price tag -- like Berkshire Hathaway, a single share of which costs over $115,000.

The cost is $29.99 per month for unlimited trading. Most other brokerages charge $5 to $10 a trade. Foliofn is able to charge the flat fee because of a technology it has built that allows it to make trades twice a day, rather than throughout the day. That saves Foliofn money.

The business has a number of risks. For starters, investment in index funds usually is based on the notion that investors will get historic returns if they buy entire bunches of stocks. By manipulating what's in an index, investors could increase their risk.

What's more, new online brokers are showing up -- often connected to people's checking and savings accounts -- with discounts, challenging Foliofn's business model.

Foliofn for the most part has catered to institutional investors, such as money managers, who use the products to manage their clients' money. That wasn't always the plan, but it was the safest route Foliofn saw as other online brokerages such as ETrade and Ameritrade were battered in the early part of the decade.

Now, however, Foliofn is beefing up its online presence to try to recruit more retail customers. Wallman claims the market downturn is a positive for that effort. It has made investors more aware of what they're investing in and how they should be using their money, he said.

"In markets like this people start to think about they could be a more successful and better investor rather than investing in the latest one stock," he said.

By Zachary Goldfarb  |  August 8, 2008; 3:50 PM ET  | Category:  TechPost
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